Texas Supreme Court Holds that Individual Beneficiary Had Standing to Bring a Legal Malpractice Claim Involving a Loan From an Account Managed by a Corporate Trustee

1Lawyer

On May 27, 2016, the Texas Supreme Court held that an individual beneficiary of a self-directed retirement account managed by a corporate trustee had standing to bring legal malpractice claims against a law firm based on advice allegedly given regarding loans from the retirement account. Linegar v. DLA Piper US, LLP, No. 14-0767, 2016 Tex. LEXIS 409 (Tex. May 27, 2016). In 2008, one of Linegar’s companies merged with a Seattle company called Saflink. Saflink was represented in the merger by DLA Piper, and Linegar’s company was represented by a different law firm. After the merger, Linegar owned 35% of the new company, IdentiPHI, Inc. Following the merger, DLA Piper represented IdentiPHI as corporate counsel. In the process of completing the merger, Linegar became aware that IdentiPHI needed capital to stay in business. Linegar arranged a $1.75 million “bridge loan” to IdentiPHI funded from his retirement account in Australia. Linegar testified that he believed DLA Piper represented him on this loan (a fact which DLA Piper disputed) and that the firm told him that the loan would be secured and “everything would be taken care of.” The trustee for Linegar’s retirement fund, Zaychan, served as the lender for the loan to IdentiPHI, and Linegar agreed and accepted the promissory note as chairman and director of Zaychan. As the maturity date neared, Linegar discovered that DLA Piper had not filed a UCC-1 financing statement to perfect the note. In order to comply with Australian law, Linegar took out a mortgage on his home and repaid his retirement account. Zaychan assigned the IdentiPHI note to Key Ovation, one of Linegar’s other companies, and Key Ovation eventually loaned IdentiPHI another $400,000.

IdentiPHI ultimately filed for bankruptcy. If the security interest had been timely perfected, Key Ovation (and thus Linegar) would have recovered the full amount due under the note. Instead, the debt was subject to challenge under section 547 of the Bankruptcy Code, and Key Ovation settled for only $150,000, which it then paid to Linegar. Linegar, Key Ovation, and Zaychan sued DLA Piper for legal malpractice and other tort claims based on the firm’s alleged misrepresentations and failure to perfect the initial loan security interest. Zaychan’s claims were dismissed on summary judgment, Key Ovation non-suited its claims, and only Linegar’s claims proceeded to trial. A jury found for Linegar on his legal malpractice, negligent failure to warn, negligent misrepresentation, fraud by failure to disclose, and breach of fiduciary duty claims. The trial court entered judgment that Linegar recover over $1.1 million, and DLA Piper appealed.

The Eastland court of appeals reversed and rendered a take-nothing judgment, determining that Linegar did not have standing to bring suit against DLA Piper. No. 11-12-00201-CV, 2014 Tex. App. LEXIS 8012, at *11 (Tex. App.—Eastland July 24, 2014, pet. granted). The court of appeals reasoned that: (1) Zaychan, not Linegar, was the holder of the IdentiPHI note, so any misrepresentation about the note or its secured status would necessarily have been made to Zaychan; (2) Linegar did not gain standing by replenishing the trust with personal funds; and (3) Linegar lacked standing as a beneficiary of the retirement account because there was no evidence Zaychan, as trustee, could not have or would not have enforced a cause of action against DLA Piper. Id. at *9.

In Texas, the standing doctrine requires a concrete injury to the plaintiff and a real controversy between the parties that will be resolved by the court…. The plaintiff must be personally injured—he must plead facts demonstrating that he, himself (rather than a third party or the public at large) suffered the injury…. [The injury] must be concrete and particularized, actual or imminent, not hypothetical…. [T]he plaintiff’s alleged injury must be fairly traceable to the defendant’s conduct…. [And] the plaintiff’s alleged injury [must] be likely to be redressed by the requested relief.

Id. (citing Heckman v. Williamson Cnty., 369 S.W.3d 137, 154-55 (Tex. 2012)). Standing is a question of law for the court to decide, and it is determined on a case-by-case basis. Id.

The Court examined its prior opinion in Murphy v. Campbell, in which the Court held that three major stockholders of Colonial Food Stores, Inc. had standing to assert claims against Colonial’s accountant/auditor regarding the tax consequences of a sale of the company to a third party. 964 S.W.2d 265, 267-68 (Tex. 1997). The Court held that because the accountant/auditor had counseled the individual stockholders directly and the tax consequences of an IRS ruling fell directly on them, they had suffered a direct loss and thus had standing to assert causes of action separate from any claim Colonial might have had as a corporation. Id.

In Linegar, the Court noted that DLA Piper was making essentially the same argument that the accountant/auditor had made in Murphy (i.e., Linegar had suffered no damages and lacked standing because any wrong committed had been to Zaychan as a corporate entity, not to Linegar individually). 2016 Tex. LEXIS 409, at *12. But the Court noted that that was not how Linegar pled his claims and submitted his case to the jury. Instead, he asserted that DLA Piper had wrongfully advised him directly, in his individual capacity, and furthermore, the perfected status of the loan was more important to Linegar than it was to Zaychan because the end effect of a loss on the loan would fall on him directly, not Zaychan. Thus, the Court held that Linegar had met his threshold burden of standing, just as the stockholders had in Murphy. 2016 Tex. LEXIS 409, at *14.

The Court did recognize the general rule that ordinarily (but not always), the trustee is the proper plaintiff to bring suit for losses the trust suffers. See id. at *15 (citing Restatement (Third) of Trusts § 107 cmt. b (2012)). However, the Court stated that it did not need to examine whether an exception to the general rule applied because the case had not been tried on claims that DLA Piper violated duties it owed to Zaychan as trustee, nor on a claim that the trust assets for which Zaychan was trustee had suffered a loss. Id. Again, the Court held that the case that was submitted to the jury was on claims that DLA Piper violated duties it owed to Linegar in his individual capacity and that those violations had proximately caused damages to him individually. Id. at *16.